Nvidia Earnings for 2Q 2013 – GPU Strong, Tegra Murdered

Nvidia [NASDAQ:NVDA] today announced their earnings for the second calendar quarter of 2013, which is also their second fiscal quarter of their fiscal year 2014. Nvidia reported that they had earned GAAP income of $96.4 million on $977.2 million in revenues. This increase in net income of 23.8% over the previous quarter and 2.4% of revenue is overshadowed by the 19% decline over the same quarter a year ago in terms of income and 6.4% in terms of revenue from $119 million on $1.044.3 billion.

Now, looking at the reason for this mixed earnings result we can see that Nvidia took a significant hit in the second quarter to their Tegra processor division. This division encompasses both consumer products as well as embedded solutions which include automotive and such. As Jen Hsun Huang, Nvidia CEO, stated in the earnings call, the automotive division is on pace for a strong quarter every consecutive quarter and he expects significant growth. So, clearly, Nvidia’s automotive division isn’t holding down the Tegra division. What is really holding down Nvidia’s Tegra division, which shrunk 49% over the previous quarter and a massive 70.7% over the same quarter a year ago is their so-called ‘trough’. Nvidia cites that they expected this to occur, however, they were disappointed by the magnitude of this ‘trough’ which I would more call a ‘canyon’. Nvidia went from $179.7 million in Q2 2013 to $52.6 in the last quarter, a steep decline year over year.

Jen Hsun didn’t directly lay the blame on a later than usual Tegra roll-out or the fact that WinRT completely bombed, as we expected it to. The truth is that Nvidia and Qualcomm both had expectations of WinRT’s success based on Microsoft’s promises, however, it appears that Qualcomm’s expectations were less affected by WinRT primarily because Qualcomm’s business is much more smartphone heavy while Nvidia’s is more tablet heavy and therefore more prone to a tablet OS flop.

On the Bright Side, Nvidia was solid in their GPU division, reporting overall increases of 9.3% over the previous quarter and an increase of 7.5% year over year. This can be attributed to the continued proliferation of higher ASP Kepler products and the full saturation of Kepler through Nvidia’s GPU product portfolio. Since the GPU division makes up 87% of Nvidia’s revenues at the current moment, they are able to once again save the company’s bottom line with strong GPU sales thanks to gaming and compute.

However, even though Nvidia reported somewhat good earnings, investors have punished the stock as a result of the announcement that Nvidia would be adjusting the Tegra division’s revenue and earnings downward for the fiscal year 2014 due to this quarter’s performance. It was originally expected to be flat due to the dip between Tegra 3 and Tegra 4, but the dip really became more of a drop so they’ve had to adjust. Nvidia will clearly report significantly more shipments of Tegra in Q3 with Shield, Toshiba, HP and ASUS tablets all shipping with Tegra 4 chips. However, this will likely not be enough to offset the canyon left by the last quarter which is the reason for Nvidia’s revision.

I long believed that 2013 would not necessarily be a good year for Nvidia’s Tegra division as is already becoming quite clear. However, 2014 may be an entirely different story with Nvidia’s Tegra 5 ( Logan ). This SoC with Kepler graphics promises to deliver an entirely new level of performance and functionality and has the ability to turn the tide for Nvidia’s Tegra division against Qualcomm’s Snapdragon and Samsung’s Exynos chips. I believe that Intel will also become more competitive in the space in 2014, which may hurt Nvidia’s Tegra sales if their product doesn’t compete with Qualcomm and Intel’s offerings. But, I have a strong feeling that Nvidia’s Tegra 4 is a stop-gap measure until Tegra 5, which is really what we should be waiting for.